Bovespa Index Drops as Gafisa Tumbles on Brazilian Rate Outlook

March 8 (Bloomberg) -- The Bovespa index retreated after a
two-day rally that was the biggest in the world amid speculation
that Brazilian policy makers will increase borrowing costs to
tame inflation, curbing demand for stocks.

Homebuilder Gafisa SA fell the most in a week, leading
declines among companies that sell on credit. OGX Petroleo & Gas
Participacoes SA, the oil producer controlled by billionaire
Eike Batista, sank after posting its biggest one-day surge in
more than four years yesterday. Farm company Vanguarda Agro SA
and paper maker Klabin SA followed commodities lower.

The Bovespa declined 0.7 percent to 58,432.75 at the close
of trading in Sao Paulo. The gauge rose 5.2 percent in the two
days through yesterday, the biggest rally in that period among
94 major equity benchmarks, according to data compiled by
Bloomberg. It gained 2.7 percent this week, the best performance
since the five days ended Nov. 23.

“Despite the gains we’ve seen in the past two days, the
main problems are still there,” Clodoir Vieira, an economist at
Sao Paulo-based brokerage Souza Barros Corretora, said in a
phone interview. “The economic recovery is still weak and
inflation remains worrisome.”

Consumer prices as measured by the IPCA index rose 0.60
percent in February, the national statistics agency said today
in Rio de Janeiro, which compares with the median estimate of
0.49 percent among 44 economists surveyed by Bloomberg.

OGX tumbled 8.5 percent to 3.11 reais after yesterday
surging 16 percent. Batista’s holding company EBX Group Co.
signed an agreement with Grupo BTG Pactual to co-run a strategic
and financial management committee for his six publicly traded
companies, according to a March 6 statement.

Klabin, Vanguarda

Thirty-six stocks declined on the Bovespa today while 33
gained. The real appreciated 0.7 percent to 1.9442 per U.S.
dollar.

Petroleo Brasileiro SA, Brazil’s state-run oil company,
slid 3.1 percent to 18.37 reais. The stock gained 8.7 percent
this week after raising diesel prices by 5 percent, helping to
reduce losses from selling fuel at a discount as part of a
government policy to fight inflation.

“The increase in diesel price may be a sign of a broader
change in economic policy, it could be a sign that the
government won’t use Petrobras as a tool to fight inflation
anymore,” Otavio Vieira, who helps manage 270 million reais as
a partner at hedge fund Fides Asset Management, said by phone
from Rio de Janeiro. “This type of intervention was driving
investors away from the stock market, and the government may
have noticed that and is now trying to change.”

The Bovespa has dropped 7.7 percent from this year’s high
on Jan. 3 amid concern accelerating inflation may curb Brazil’s
economic recovery and the government’s interventionist policies
will hurt profits in industries including utilities and energy.
The MSCI BRIC Index of shares in Brazil, Russia, India and China
has slid 1.7 percent over the same period.

Brazil’s benchmark equity gauge trades at 11.9 times
analysts’ earnings estimates for the next four quarters,
compared with 10.9 for the MSCI Emerging Markets Index of 21
developing nations’ equities, data compiled by Bloomberg show.

Trading volume for stocks in Sao Paulo was 7.69 billion
reais today, data compiled by Bloomberg show. That compares with
a daily average of 7.59 billion reais this year through March 6,
according to data compiled by the exchange.